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Can Macerich Beat Retail Blues With Revamp, Coworking Concept?

Zacks Equity Research

Mall landlords are making concerted efforts to boost their asset productivity by trying to grab attention from new and productive tenants, and disposing the non-productive ones amid the retail apocalypse. The companies are avoiding heavy dependence on apparel and accessories, and rather expanding their dining options, opening movie theaters, offering recreational facilities and opening fitness centers.

Particularly, Macerich Company MAC is aimed at enhancing its asset quality as well as customer relationships through redevelopment efforts and increasing adoption of the omni-channel model. Through redevelopment, the company is focusing on repurposing properties as well as improving its merchandizing mix and shopper experience.

As part of such initiatives, the company is currently revamping The Fashion District of Philadelphia and Scottsdale Fashion Square. The company is also partnering with co-working provider Industrious to add flexible-office spaces into its retail centers. These efforts are expected to boost demand for its properties. In fact, re-leasing spreads for the 12-month period ended Jun 30, 2019, increased 9.4%.

Moreover, the company's joint venture with Hudson Pacific Properties is redeveloping the iconic mall, The Westside Pavilion, in West Los Angeles into a 584,000-square-foot Class A urban creative office campus called One Westside. During third-quarter 2018, the company also announced a 50/50 joint venture with Simon Property Group for creating the Los Angeles Premium Outlets. We expect such moves to offer an upside potential to the company and enhance its high-end portfolio.

Macerich also has a decent balance sheet with well manageable schedule of debt maturities. In fact, as of Jun 30, 2019, the company’s cash and cash equivalents summed $104.9 million. In addition, the company’s debt maturity schedule is well laddered and average debt maturity is 5.22 years as of Jun 30, 2019.

Nevertheless, mall traffic continues to dwindle due to a shift in shopping patterns, with online purchases taking precedence. This has forced retailers to reconsider their strategy and shift investments from traditional retailing to online channels, and optimize their brick-and-mortar presence.

These optimization efforts and the consequent decision to close stores by a number of retailers have raised concerns over cash flows of mall landlords. Also, retailers unable to cope with competition have been filing bankruptcies. This is affecting demand for retail real estate space and emerged as a pressing concern for retail REITs like Macerich, Simon Property Group Inc. SPG, Kimco Realty Corp. KIM, Taubman Centers, Inc. TCO and others.

While Macerich is striving to counter such pressure through various initiatives, we expect store closures and bankruptcies to keep the market turbulent in the rest of this year, and moderate growth.

Currently, Macerich carries a Zacks Rank #3 (Hold). The company’s shares have lost 23.4%, while its industry inched up 0.2% over the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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